Most recruiters are losing money

This blog is blunt. It’s about the commercial reality of making money in recruitment. If you run a business, and are making no money, this will probably explain why.

Or if you are a recruiter, it could explain why you can hardly scrape by on your income, or why you will get fired.

And the data suggests lots of recruiters, companies and individuals, are losing money. Many of them are managing to do that in an improving economy!

Want proof?

The latest Plimsoll Report in the UK certainly highlights that some companies are taking advantage of the improving UK economy. But closer inspection of the data tells us that 234 of the ‘Top 1,000’ UK recruitment companies, are actually losing money! And 163 of the ‘Top 1,000’ are ‘in danger’, and ‘likely to fail’. And that is in the strongest UK economic environment for the best part of a decade.

Australia is no better. We are all aware of the high profile failures of listed recruitment companies HJB and Bluestone in the past year. But let’s dig deeper. The RIB Report tells us that 27% of Australian recruitment companies made a loss in 2013. In fact, 4 out of 5 firms showed a decline in profitability on 2012 results. In other research, we learn that 17/24 Australia’s biggest recruiters saw a OP decline in 2013. And 2014 financial reporting shows further decline in profitability across major companies, with a few exceptions.

And the RIB report tells us why too. Consultant productivity is at an all time low. It’s bizarre, because sales are going up for many Australian and NZ recruiters, but profit is going down. And if anything is a sure slippery slope to recruiting hell, this is it. Profitless growth. Why is it happening?

Because individual recruiters are billing less as a percentage of their salary and on-costs than ever before.

In fact, from a ratio of almost 3 times GP to salary cost in the 5 years from ’03 to ’07, we have seen that ratio declining for the last 4 years, reaching an all-time low of 2.2 in 2013-14 financial year. And that is not enough to guarantee corporate profits.

And yet, even now, I often hear owners and managers of recruitment businesses say things like. “Oh she is not my best recruiter, but I only pay her $80,000 a year and she is billing $120,000 a year, so she is covering her cost, and more”

Wrong. Very wrong.

Let’s examine the realcost of a recruiter to your business.

Base Salary: 80,000

Direct on costs: Varies from country to country, but includes statutory pensions, superannuation, payroll tax, insurances etc. In Australia, this is comfortably 15% of salary, and maybe more.

Additional employee benefits: Could include obvious thing like a car provided, but there are other costs that can slip under the radar, such as car parking, membership fees etc. Include these in the cost of the individual if they are direct benefits to the employee that would disappear if the employee disappeared.

Cost of seat. This is the big one. This is the cost that most managers don’t truly factor in. I define it as follows, ‘The average cost of each recruiter, not including recruiter salary’. This is how you work it out. Go to your P & L. Take a period of a year, preferably. Go to the total expense line of the business, or for a branch or business unit. Subtract total consultant salaries and bonuses from that number. Leave in the salaries of the manager and the admin staff, as these are there to support the recruiter. Once you have that number, divide it by the number of consultants in the team. That number represents the cost to you for each consultant to put their delicate derriere in your seat before you have paid their salary.

And here is my shocking prediction. That number will be between $80,000 and $100,000. Normally closer to $100,000. (In Australia. £50,000 in the UK). Per consultant. Before you take into account their salary.

So now lets add up the cost of a consultant on a basic salary of $80,000 pa.

Salary: $80,000On costs (15%) $ 12,000Benefits: $2,000COS: $100,000

Total cost before the business makes a single dollar, equals $194,000.

So now we know that if this person bills anything less than $194,000, they are costing you money. That’s why we want every recruiter to bill three times his or her base salary. Typically it works like this;

1/3 for the consultant salary
1/3 to cover COS
1/3 for return to the business

The sad fact is that many recruitment companies are happily paying the first 2 thirds, and never seeing the final third.

The key business imperative across our industry is to improve consultant productivity. To do that we need to hire the right skills, train, coach, mentor and provide all the modern tools they need to thrive.

Carrying long-term mediocre recruiters is like running a sheltered workshop. Now, running your business as a not for profit charity, to help enrich your mediocre consultants, while you mortgage your house, is fine, if that is really what you want to do.

But if you are going to be giving your hard-earned money away while you carry all the business risk, wouldn’t it be better if you give the money to ‘Save the Children’ or Cancer research?

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29 Comments

I run a Cost Benefit Analysis spreadsheet on every recruiter in my office. My FC allocates every expense that the business incurs across revenue generating head count ( I mean everything from the pens they use to the admin who support them). You must run a business by numbers not by emotion. To many recruiters these days earn far to larger base salary without any concept of return on investment. Our industry is going soft at a time when we need to be tightening up to take advantage of strengthening hiring intentions.

Samuel I don't agree, my base salary is £25,000 and I bill more than that in 1 or 2 months.
If anything our profession is already way too disrespected, why would you want to devalue your fellow recruiters more just so YOUR business can make more money?

Daniel you make me smile, I am not talking about restricting income. As a consultant you should be focused on your commission payments not putting your hand out asking why you base is not higher. We are in a sales role with uncapped commissions if you are not earning enough money then it is directly proportional to your lack of placements or success as a consultant. The lower your base the easier it is to achieve commission??? Please don’t be offended as no offence is intended

Samuel, I'm intrigued by your response to Daniel and Yes, I fully believe consultants should focus on their commission as this was why we initially chose recruitment (So we can have meritocracy on our earnings).
I wanted to see your thoughts on how much someone like yourself would give a (new) Team Leader who has: billed from Jan,2014 to date, £535,000 and is on target to hit plus 720K. Btw I'm comfortable with my commission however, my base is 28k.
Feel free to advise what sort of base salary in your perspective is fair?

I agree with you, Daniel.
In most companies I have been involved, I have pretty much built my own business (regardless of what training/mentorship) my employer promised before joining.
As far as I am concerned, you can send them home and save the overhead (COS).
As Mike Gionta explained in his webinar with Mark Whitby, very few of these companies really offer anything tangible to a recruiter for them to increase productivity. Most of us just slog it out on our own. Fortunately, I am in a different position with my current employer, but my skills getting here were 90% on my back.

What a refreshing article - and a must read for all recruitment companies out there. We need to start training and educating our recruiters so that as owners we dont run at a loss but also so as recruiters they start seeing more benefit and dont burn out.

My ex firm has a sales target of 4X base salary, and they don't pay commission if you don't hit above it.
And the commission is based on whatever you earn minus the 4X, so they would have secured a base for them.

This is quite simply why I have never grown my recruitment business to more than myself and admin staff.
I know so many great recruiting businesses that do the same, but i also know many others who have to clear so much profit every month/quarter before they manage to break even.
Keep it Niche, Keep it small, Keep a clear focus, Keep more of the money you bill!...

Hi Greg,
Even though you figures are somewhat rubbery I agree with the point you are trying to get across. This doesn't just apply to recruitment firms since very few organisations really understand the full loaded cost of employing people.
I use the term organisations, because often the worse are what we call Public Service organisations in Australia and Civil Service in the UK. Managers in such organisations are rarely responsible to the equivalent of what a commercial organisation refers to as the EBIT (Earnings Before Interest and Tax) level. So when adding a employee they only look at the direct costs and not all those costs which go to making up the fully loaded cost.
Taking aside the add on costs which go towards making up the fully loaded cost of an employee, I will also be a bit blunt. Any manager who really wants to improve the profitability of their business should not hire anyone on a straight salary. Why would anyone pay a recruitment person in the UK £25,000 or one in Australia $50,000 without any form of incentive arrangement? My view is that even the cleaners should be on some form of incentive (pay for performance program). For sales / business development people this should be at least a 70:30 arrangement. 70% base and 30% on target achievement with uncapped over performance pay. The best people, those committed to achieving will never have a problem with such an arrangement. The world owes me a living type always will.
Best regards
Bill Ellerton
Mature Job Search
info@maturejobsearch.com.au

Well equally you can force out good recruiters by being too over the top. I understand that I'm there to make the company a profit.
My last job year 1 base salary £17,500 (yes that's not a typo!)
Threshold for commission per month - £3000
Total earnings including all bonuses at year end less than £29,000. Target £100,000 Total billings over £109,000. DO NOT TRY AND TELL ME THEY DIDN'T MAKE A PROFIT ON ME.
Year 2 base salary £18,500
Threshold £4000 = (yes that does mean that as a reward for hitting my target my boss gave me a real terms pay cut of £200 pa)
Target £150,000 (laughable for a salary of under £20,000 and bearing in mind the miserly pay increase or should I say cut)
Billings at year end £80,000. Now this time I might have been break even to the company after salary (less than £25,000) rent and rates plus the cost of the 1 part time admin staff we had (everyone else was a billing consultant) But I wanted to be there about as much as I would being in hell itself. So I quit!
I think companies need equally to realise that if they expect us to "do whatever it takes" and work "as many hours as it takes" then we deserve to take home 33% of all profits we make for a company. I don't believe that the world owes me a living. But whatever happened to the term "a fair days work for a fair days pay"? All I see nowadays are employers who expect 60 to 70 hours work out of people a week for as little as they can possibly get away with paying them.
Bottom line - I don't work so you can have a wonderful house and a fantastic life from my work. I work so that my family can have a life that we are happy with. Maybe bosses forget that we're not money making robots. We're people.

Greg, I always agree with a lot of what you say, however when you mention improving consultant productivity through training, coaching and mentoring do you agree that it's essential that the consultant needs to have the right behaviors in the first place?? If their not a knife you can't sharpen them...or can you? Advice always welcome :)

Mark, I think hiring the right skill and attitude set in the first place is key. In fact if you look at the sentence in my blog which talks about training etc, you will see that it starts with mentioning that we HAVE to hire the right people first. Thanks so much for reading my blogs and your comment, cheers Greg
To do that we need to hire the right skills, train, coach, mentor and provide all the modern tools they need to thrive.

Thanks Greg - the right skills or behaviors being;
A high level of energy, self-confidence, resilience, a well established habit of industry by being totally self-disciplined (hard to gauge at interview), and a chronic hunger for cash. I think all recruiters should have all five of these traits. Thanks again

Greg, your article is extremely thought provoking but a solution please?
Ahhh... economies of scale is interesting, it lures in Recruitment Managers who play with head count numbers...
This is a real case study. For a couple of years I managed a team and ran my own P&L in a large agency. Regardless of how many Consultants I had in the office, I paid the same floor space for 6 desks in Sydney and 4 in Parramatta and then all other costs fluctuated as I grew. When I took over:
We had 5 billing heads and the cost to company was about $16K each per month (Our total expenses was $80K per month).
With 9 billing heads + 1 admin the cost to company was about $13K per Consultant per month (Our total expenses were about $120k per month).
So, the more I hired the lower they had to bill to cover cost and the easier it was to increase profit - right? Guess what happened, the profits stayed the same but the costs increased and average billings decreased. Golly gosh - how bizzare :)

Hi Greg,
Spot on. At the end of that gig, I stopped managing staff and swore never to do it again, I love recruiting but don't want to ever manage recruiters again. That was my first proper Management role, in early 2006, I was in my late twenties and was the top performing Senior Consultant, the Manager quit so they gave me the gig with no support on how to manage Recruiters and with the mandate to grow as quickly as possible.... The economy was going mental and we wanted to make money. I think the primary reasons for the trends you have detailed above are:
1) A change in the market - the boom days are over. A lot of agencies have failed to adapt. It is much harder, I am noticing more rookies doing the activity, making the reverse market calls, making the head hunt calls, setting up strong social media campaigns but not gaining traction. I was hitting target my third month into recruitment, most successful people seemed to do that - it doesn't seem to happen like that anymore. We have a phenomenal young lady in the office who is a year into it and starting to hit targets - I reckon she is twice as good as I was starting out.
2) In-effective Management - I had no clue what I was doing when I was a Manager and most of the Team Leaders who are responsible for Rookies and less experienced Consultants don't get any training on how to manage people. Plus they have full billing targets with no time to performance manage. I reckon the phenomenal young lady I mentioned above could have got there faster with more guidance.

RM, your story is a classic one, seen many times. A strong recruiter is promoted to manager with no support, no tools, and maybe not even the temperament for what is a VERY different job to recruiting itself. Often leads to disaster. In fact I think that is my next blog! Thanks Greg

This post seems right, i have a friend who work as a recruiter and both of you have same problems. His salary is not that high like yours so i think he got a Big Big Big problem compare to you.
I also work at recruitment companies same like you, but i don't encounters losing money.

Help please! We have very good commission rates and one biller gets 46% of every dollar billed + 9.5% super (no cap on super) = 55.5% Add Payroll tax and it is almost 60%. This consultant is consistently our number 1 or 2 producer but rarely our number 3. Is committed, starts at 7.15am and leaves at 7 or 8 or 9pm. We ALWAYS pay commissions that are due and this recruiter, he earns consistently in the $180 - $220K range. I read what some others have said but are we 'overpaying'? Comments please - from anyone.

David, if you pay, as you say, 60% of what he bills to the recruiter (including on costs), and you are paying him 200k, then he is billing around 330k per annum. If you add the COS of 100k to this, then the total "cost" of that recruiter is 300k..out of 330, so the company profit on his efforts is marginal. basically one bad debt away from a loss
I have had to make some assumptions here, so if you have any more details let us know, but I have no doubt the commission % is far to high, with on-costs on top

I understand what the big commotion is about in this thread, we have people complaining and throwing their view points around.
The universal truth is: Agency Recruitment is "SALES".
The harder you work, the smarter you work and the more you network = Your billings.
If you think you are doing a brilliant job for your company, and making it a ton of $$$, I'd suggest you go out on your own and make that money for yourself.
Look at any industry and have a look at the base rates of Sales Professionals, you will find that where ever there is a higher salary, the commission structure is tighter.
I remember working for Vodafone at one stage on 25K NZD base, I didnt go home without at least 70K per year, and im not saying that to boast or anything, im just saying if you can accept a 60K Salary and negotiate an aggressive commission structure you can make serious money; only thing is you will need to put your money where your mouth is.
Recruitment is not rocket science, neither are there any hard barriers to get into it, hence why there are cowboys aplenty who arent worth the salary's that agencies are paying them.
Sad to say, half the people I have worked with, sat on FB, linkedin, news websites or other non work related things during work time - when they needed to be on that phone!!
Much love and luck for all you recruiters out there :)

Great article as always Greg, and very apt for someone like me running a small, independent recruitment consultancy. My accountant has always explained to me that as a rule of thumb my consultants should be paid roughly a third of what they bill, which reassuringly matches what you suggest!
Looking through the comments in this thread, there appears to be an us (employers) and them (employees) theme! Not surprising, I suppose. May I suggest to those employees who think they are being screwed over by their bosses that they start up their own recruitment businesses and reap all the wonderful rewards. As a word of warning to those good people though, you will have to take some major risks and be prepared to accept the consequences. Not sure of the numbers, but more businesses fail than thrive, or even survive. Also, be prepared for 'feast and famine'. I didn't pay myself for nearly 2 years in 2008 -2010 just to keep hold of my colleagues and business. With a wife and three teenage kids that was tough.

This looks about right to me, although most of the "high street" recruitment businesses get around this by offering very small basic salaries (£18,000 - £20,000) and therefore they can be more profitable for small billers.
In a contingent firm, there was a time when a perm consultant doing a £200,000 year was poor, a £300,000 year was good, a £400,000 year was very good and a £500,000 year was absolutely exceptional. These days, most good contingency recruiters are doing about £250,000 and the really good ones are doing £300,000. There are certainly expections but I know enough people across the City to know that if you are billing over £300,000 in permanent, contingency recruitment you are in the top 2%
Just on these figures. A lot of the available recruitment data is from listed companies or those that have to report. As we all know, a significant number of recruitment business do not fall under this category and therefore the data is never reported. And I think many of the industries most high margin recruitment businesses fall in to this category. Whereas the high volume, low margin companies are.

The typical starting salaries for recruiters in my state are $20,000 - $30,000 + commission or $30,000 - $40,000 on a salary draw system (don't meet a target, no bonus and you 'owe' that production back to the company next month). I am aware of one firm that currently pays $16/hr (32K) flat fee with no commission or bonuses.
An ever-more popular model around here seems to be a straight commission-only role offering the fantastic base salary of absolutely nothing and many of the expenses are typically covered out of the recruiters own pockets (phone bills, computers, transportation to and from client meetings, advertising, etc) so there are no desk costs to the firm.
The real reason many firms (at least in this geographical area) are not making any money is because they offer ridiculous rate discounts in an attempt to impress potential clients.
Some slash their rates down to as low as 5%-10% to try and attract new business. Others pick up poorly-qualified contingency jobs that can never pay for multiple reasons. (I actually know of a one firm that created a "satisfaction guarantee" that forces it to place candidates with its "premium preferred" clients at a LOSS. How it ever expects to earn money when it fills jobs for negative fee-levels is a mystery. How a business that doesn't pay for services gets premium preferential treatment is even more of a mystery to me.)
Many recruiters work diligently to fill these jobs only to discover after putting in many hours of work that little (or no) money will be coming their way.
A decent placement fee is 20-30%. If a firm wants its recruiters to bill more, it needs to deal with quality clients that are serious about hiring and willing to pay an equitable fee in order to ensure superior service.

It's kind of messed up. People are essentially charging less, yet offering the same service. Why?
I appreciate the economy is improving and this often serves as a reason that a product or service is provided at a cheaper rate, but the problem is... these aren't 'products', these are real services, which involve people's real time and efforts.
I read a similar article on an actual recruitment website, which makes me now see there is a serious issue at play here: https://www.ljdoulton.uk/blog/contingency-why-it-just-doesnt-work-in-recruitment-anymore/
We've got to look after each other in business. Paying somebody less for the same great work serves no logical benefit to them, and will simply and eventually put them out of business.

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GREG SAVAGE

With a career spanning four decades, Greg is a founder of 4 highly successful businesses, is a trusted advisor and respected voice across the global recruitment and professional services industries, and a regular keynote speaker at conferences around the world.